Recent news says that between 33% and 43% of real estate transactions are all cash transactions. Unless you are banking on value appreciation to make money this is the equivalent of burying your Gold. When it’s buried, you can’t spend it or otherwise use it. You also can’t leverage it to make even more money.
Most first-time real estate investors miss many opportunities by thinking too small. If you were offered the opportunity to buy 1 house earn 7% to 8% on your money after expenses OR you could buy 5 or 10 houses and earn 15% or 20% rate of return and receive the appreciation on 5 or 10 houses instead of 1 would you?
There is something to be said about the pride of ownership. However, the harsh reality is that as long as you pay taxes on real estate you don’t really own it because if you don’t pay the taxes the government will relieve you of your property to pay the taxes. So how do the rich like Donald Trump and many others really make money in real estate?
- Speculation or appreciation – Quite simply buy low and sell high. This is risky business and throughout history, for every single land or real estate speculator that got rich, there are numerous thousands who lost every dime and a few that broke even and made nothing.
- Cash Flow – If you have tenants paying rent that money after expenses and reserves goes right into the investor’s pocket.
- A combination of cash flow and appreciation
The people that are truly wealthy in real estate built their long term wealth by looking at cash flow and if they did their research then they got a little appreciation in the mix too.
If you’ve read this far you may be saying “Well that’s all fine and dandy but I don’t have a $1 million or $3 or $4 million to buy enough property to make the really big bucks the rich do.
You don’t have to have that kind of money lying around because the rich don’t either. The wealthy other people’s money. This money does need to come in the form of full recourse bank money. Something the non-US citizen investors found years ago is that there are other sources of non-recourse money. Let’s define those terms if you’ve never heard them before.
- Recourse real estate loan – is a mortgage or loan that is secured by real estate AND by the borrower personally. If the borrower defaults the lender or issuer of the debt repossess the collateral or in this case the real estate AND can go after the borrower to recover additional expenses from lost interest payments to attorney fees.
- Non-Recourse real estate loan – is a mortgage or loan that is secured solely by the real estate property itself. If the borrower defaults then the lender or issuer of the debt can repossess the collateral or in this case the real estate AND the recovery is limited to the real estate itself.
Who issues this kind of loan? Private companies who have for their backer’s money from insurance companies, hedge funds, retirement funds and private and wealthy individuals that prefer their assets be secured by real estate.
You may ask: Isn’t that the “Hard Money” that I’ve heard about? Quite simply NO. Hard Money has a purpose for short term financing that other forms of loans won’t do such as rehab a large building that is not income producing because it has fallen into disrepair or 20 houses that are in disrepair and need tenants after they are repaired. Rates are double digit and points can range 5 or 6% PLUS Closing costs and generally need to be paid in 12 months.
Serious private lenders in real estate want solid income producing and managed properties for their end investors so if you want to make a down payment on one of these properties then they will loan you the rest of the money based on the property and it’s income that it produces.
General types of Non-Recourse loans for income producing properties
- Blanket Non-Recourse real estate loans
- 5-or-10-single family homes in 4 states or 1 state
- Single family homes, condo’s, duplexes, triplex and 4-plexes all under one loan and the properties are all over the US.
- two, three or more office buildings in the same city or different cities
- Medical Office Strip Centers – one or multiple buildings
- Straight Commercial Non-Recourse Real Estate Loans – All of the commercial type buildings as noted above but just one per package
There is a bit more than this to making money in real estate and if you want to get your hands dirty then there are opportunities to do property management but the wealthy don’t deal with Tenants, repairs or collecting rent they pay management companies to do it.
So we’ll end with our opening question. If by investing the same amount of money to buy 1 house you and maybe earn 8% on your money after expenses could buy 5 or 10 houses and earn 15% or 20% rate of return and receive the appreciation on 5 or 10 houses instead of 1 would you?